Monday, January 16, 2012

This paper examines how different establishments performed during the recent global financial crisis, focusing on the role of foreign ownership. The paper investigates how foreign ownership affected establishments' responses to negative economic shocks, using a cross-country panel dataset with detailed information on operation, location and industry for more than 12 million establishments from 2005-2008. The evidence shows that multinational subsidiaries on average fared better than local counterfactuals with similar economic characteristics.

Among multinational subsidiaries, establishments with stronger production and financial linkages with parent companies showed greater resilience. Finally, in contrast to the crisis period, the impact of foreign ownership and linkages on an establishment's performance was insignificant in non-crisis years.

In 2007-2008, the world economy entered the deepest nancial crisis since World War II. Countries around the globe witnessed major declines in output, employment, and trade. GDP in industrial countries fell by 4.5 percent while average GDP growth in emerging economies dropped from 8.8 percent in 2007 to 0.4 percent. The unemployment rate rose to 9 percent across OECD economies, and reached double digits in a mix of industrial and developing nations. World trade plummeted by over 40 percent in the second half of 2008, collapsing at a rate that outpaced the fall of total output.

The severity of what has been labeled as the Global Financial Crisis led many economists to explore its macro patterns and causes. Rose and Spiegel (2010a, b), for example, investigate the potential causes for the diferential extent of the crisis across countries. Using a large country-level dataset, they do not nd international trade and nancial linkages and other major economic indicators to be clearly associated with incidences of the crisis. Eaton et al. (2009), Levchenko, Lewis and Tesar (2010), and Chor and Manova (2011), among others, examine the potential causes of the great trade collapse, a phenomenon that received particular attention, and nd, respectively, manufacturing demand, vertical specialization, and credit conditions to play important roles.

Less explored in this debate is the pattern of micro economic responses to the crisis. In this paper, we examine the di¤erential performance of establishments during the global crisis with particular emphasis on the role of foreign ownership. We investigate how foreign ownership a¤ected establishmentsresilience to the negative economic shocks using a worldwide

establishment panel dataset that reports detailed operation, location, and industry information of over 12 million establishments in 2005-2008. We exploit how multinational corporation (MNC) subsidiaries around the world responded to the crisis relative to local establishments and the underlying mechanisms that led to the di¤erential impact. This question is central to ongoing policy debates over the role of foreign direct investment (FDI) in economic growth and volatility. For many countries, such as Ireland, Slovakia, Singapore, and Malaysia, which have heavily relied on FDI as an engine of economic growth, there are increasing concerns that FDI is more volatile than domestic investments and renders countries greater economic vulnerabilities especially during economic crises.

Evaluating the role of foreign ownership during economic crises poses several challenges. First, it is di¢ cult to disentangle the e¤ect of foreign ownership from other establishment level characteristics such as size and productivity and macroeconomic factors such as market demand and credit conditions. Second, why foreign ownership could lead to di¤erential establishment performance often remains unclear. Di¤erent aspects of foreign ownership can exert sharply di¤erent, and even opposing, impact on establishment performance. For example, the ability of multinationals to shift production across countries can lead to more volatile performance while market diversi cation can lend stronger stability. Assessing only the average efect of foreign ownership can fail to capture these di¤erent mechanisms. Third, foreign ownership can aect establishment performance in both crisis and non-crisis periods. It is important to separate the general e¤ect of foreign ownership from its impact on establishments responses to negative economic shocks.

To disentangle the e¤ect of foreign ownership from the e¤ects of other establishment and macroeconomic factors, we adopt in our analysis a matching technique that creates a missing counterfactual for each MNC subsidiary. The matching pairs each MNC subsidiary with a local establishment that shares similar attributes and operates in the same country and industry. Similarity is determined based on establishment-level economic characteristics that have explanatory power in explaining establishments foreign ownership status. Matching on the basis of characteristic similarity helps control for observable and unobservable di¤erences between MNC subsidiaries and local establishments. Drawing the match from the same country and industry helps control for macroeconomic factors. The efect of foreign ownership is hence inferred from the divergence in the performance paths between MNC subsidiaries and their local matches.